Professor Adams' Lecture Materials

LO1-08: Identify situations that involve a significant impairment of the value of property, plant, and equipment and intangible assets and describe the required accounting procedures.

What is an impairment?

An impairment is a decrease in the value of a long-term asset caused by one or more of the factors below.

- A significant decrease in market price.
- A significant adverse change in how an asset is being used.
- A significant adverse change in an asset's physical condition.
- A significant adverse change in legal factors.
- A significant adverse change in business climate.
- An accumulation of costs significantly higher than the amount originally expected for the acquisition or construction of an asset.
- A current-period loss combined with a history of losses or a projection of continuing losses associated with an asset.
- A realization that the asset will be disposed of significantly before the end of its estimated useful life.

When the value of a long-term asset declines below its value recorded in the balance sheet, the balance sheet must be updated for the new information. The value of the asset is adjusted to its newly estimated value and this adjustment is referred to as asset impairment.

Assets held and used

Property, plant, and equipment and finite-life intangible assets

These assets are tested for impairment only when events or changes in circumstances (such as those listed above) indicate that the value of the asset recorded in the balance sheet is too high.
There is a two-step process for determining whether or not there has been an impairment loss.

Step 1: Recoverability test

An impairment occurs when the undiscounted sum of estimated future cash flows from an asset is less than the asset's book value.

Step 2: Measurement

If the recoverability test from step 1 indicates an impairment has occurred, an impairment loss is recorded for the amount by which the asset's fair value is less than its book value.

Indefinite-life intangible assets

These assets must be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is "more likely than not" that the asset is impaired.
"More likely than not" is determined through a qualitative assessment using a list of issues covered in the GAAP standard ASC350-20-35-3C.
If an asset's fair value is less than book value, an impairment loss is recognized for the difference.

Goodwill

Assets held for sale

Figuring out impairment for assets held for sale is the same as the process above, except the cost to sell the asset is incorporated into the calculations.
If fair value less cost to sell is less than the book value of an asset, an impairment loss is recognized for the difference.

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